A kinder, gentler raid on CalPERS’ funds

Once again the cash-strapped state wants to dip into CalPERS’ very deep pocket to avoid running out of money, getting a loan of perhaps $220 million or more from a contingency reserve fund.

But the nation’s largest public employees retirement system was up-armored after the last big raid by the state, thanks to a labor-backed initiative, Proposition 162, that squeaked by in 1992 with 51 percent of the vote.

Now Proposition 162 gives nearly all California public employee pension systems control of their funds and the apparent power to raise employer contribution rates. It’s an important factor as pension funds face tough choices after a historic stock market crash.

A new state budget signed by Gov. Arnold Schwarzenegger in February, a painful package of tax increases and spending cuts intended to close a $42 billion shortfall, authorized the state to borrow from 650 state special funds.

One of the usually restricted funds that could be tapped to help the red ink-drenched general fund is the CalPERS contingency reserve fund, which provides support for health programs.

The reserve was said to have roughly $220 million earlier this year. But the amount can spike much higher at some times during the month as funds pass through for the large health programs operated by CalPERS.

The budget provision drew a polite but firm letter to administration officials on March 2 from the CalPERS legal counsel, Peter Mixon, saying “CalPERS does not concede that such a loan is permissible.”

Mixon said CalPERS would like “additional time” to study the effects of the bill and requested “adequate notice” before any attempt by the state to borrow, so that CalPERS can take appropriate steps to protect the fund “and its beneficiaries.”

When the issue came up at the CalPERS finance committee last month, the chairman, Tony Oliveira, did not oppose a loan to the state, saying he is aware that local governments throughout the state are struggling with budgets hit hard by the recession.

“I want us to be as protective,” said Oliveira, “and have an open mind — that we are one state and one group of people — and that we have to work out what is best for the state.”

The committee vice chairman, Henry Jones, said: “My thought was not necessarily knowing the fact that we were one state, but if we have this authority, then it’s our decision. That’s where I’m at.”

“And our responsibility,” Oliveira added. “Right,” replied Jones. “I agree with you,” said Oliveira. Mixon said his letter did not “prejudge” the issue, but asked for time to evaluate a loan if the administration decides that one is needed.

A spokeswoman for state Controller John Chiang said that borrowing to preserve cash flow, unlike borrowing to balance the budget, cannot interfere with a special fund’s mission and must be repaid immediately with interest if needed by the fund.

“We would rather not speculate as to when those funds might actually be borrowed,” said Hallye Jordan.

She said administration officials believe that “by August the state’s cash balance will be zero, and we will have exhausted all $19 billion in internal borrowable funds, including those in the contingency reserve fund.”

Nonpartisan Legislative Analyst Mac Taylor has estimated that the new state budget already has an $8 billion shortfall. The gap will widen by $6 billion or more if voters reject a package of budget measures during a special election next month.

In the early 1980s, there were two battles over state attempts to balance budgets by cutting contributions to CalPERS. But the big one came in 1991, when the state faced a massive budget shortfall larger, in relative terms, than the recent gap.

Former Gov. Pete Wilson took aim at two CalPERS funds with $1.8 billion used to maintain purchasing power for retirees. His legislation took $1.1 billion of the “surplus” to reduce pension contributions by the state, schools and local governments.

In addition, he switched the power to appoint the actuary that sets contribution rates from CalPERS to the governor. And he created a second “tier” of pension payments, lowering benefits for new state employees (virtually eliminated by legislation in 1999).

Public employee unions fired back in November 1992 with Proposition 162.

The crucial actuary function, the estimates based on investment earnings and demographics of the contribution rate needed to fund future obligations, was returned to CalPERS and other public retirement systems.

The systems were guaranteed control of their administration and investments. What had been three equal responsibilities (benefits, minimizing employer contributions, reasonable administrative costs) were changed to make paying benefits the top priority.

Another letter from CalPERS to administration officials on March 2 addressed Schwarzenegger’s move to save more than $1 billion by requiring state workers to take an unpaid day off once or twice a month.

Part of the furlough plan allows worker retirement benefits to remain unchanged, even though their take-home pay is being reduced. If pension contributions were reduced along with the pay, CalPERS would be stuck with an unfunded liability.

“We have not heard a clear statement that the state will provide full, unreduced employer retirement contributions,“ said the letter from Anne Stausboll, the new CalPERS chief executive officer.

She said the CalPERS board “unequivocally reserves the power and right to determine at any time that the state’s contribution must be adjusted in order to avoid the creation of the unfunded liability …”

No need for that, said Lynelle Jolley, a spokeswoman for the state Department of Personnel Administration. She said the state will pay the full employer contribution rate and roll the employees’ contribution share into future state contributions.

Before Proposition 162 passed, some experts say trust law and court decisions, including one overturning the Wilson raid, already were giving public employee pension boards the power to set contribution rates and, in effect, spend taxpayer money.

But giving public pension boards control of the actuaries that set the annual required contribution or ARC, as it’s known in the pension business, is said to have sealed the deal.

The California State Teachers Retirement System may be the only public system in the state that can’t set its own contribution rates. CalSTRS, second in size only to CalPERS, needs legislation to adjust its rates.

The administrator of an association that includes 40 of the largest public employee retirement systems in California said pension boards have to be “realistic” about contribution rates, particulary during a recession that has local governments struggling.

“The courts have said it is reviewable by the courts,” said Rich Goss of the California Association of Public Retirement Systems. “It’s not as if you can go marching off and do whatever you want.”

But some lawyers are telling pension board members that their “fiduciary” duty is to make benefit payments a top priority, even in the face of warnings that layoffs may be needed if contribution rates are not adjusted. (see Calpensions post on 27 Mar 09: “Local pension funds: The layoff scenario.”)

The ballot pamphlet analysis of Proposition 162 written by the nonpartisan Legislative Analyst was clear about the potential consequences of making benefit payments a top priority, beyond minimizing contribution rates and administrative costs.

“Placing benefits as the highest priority could result in higher costs to employers if board decisions increase benefits without equal consideration to the cost for those benefits,” said the analyst. “These potential costs are unknown, and are dependent on future decisions of pension system boards.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 04 Apr 09